3. Diamond Offshore (DO - Get Report) is expected to benefit tremendously from growth in offshore drilling over the next few years. The underlying thesis for Diamond is similar to that for Hornbeck and Goldman sees Diamond offering comparable upside. The bank has a six-month target of $98 on the stock, suggesting tremendous near-term upside of 37% as offshore-drilling reports, ranging from rig utilization to daily day rates, strengthen. According to Goldman, "the pace of jack-up activity and pricing power is accelerating for both high-spec and standard jack-ups. We find it particularly encouraging that there is strength in almost every region," including Mexico and Asia.
Diamond Offshore and Noble Energy (NE) are Goldman's "favorite ways to invest in the offshore driller space." The bank likes the cyclical earnings power of their fleets and believes the equities are still notably undervalued. Diamond's stock has taken a beating in 2011, as a special dividend cut catalyzed a mass migration out of the stock. It is down 5.1% over the past 12 months and 8.8% in four weeks. Still, Goldman makes a compelling value argument.